Professional Documents
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Barringer E3 PPT 08
Barringer E3 PPT 08
Assessing a New
Venture’s Financial
Strength and
Viability
Bruce R. Barringer
R. Duane Ireland
©2010 Pearson Education 8-1
Chapter Objectives
1 of 2
• Financial Management
– Financial management deals with two things: raising
money and managing a company’s finances in a way that
achieves the highest rate of return
– Chapter 10 focuses on raising money. This chapter focuses
primarily on:
• How a new venture tracks its financial progress through preparing,
analyzing, and maintaining past financial statements.
• How a new venture forecasts future income and expenses by
preparing pro forma (or projected) financial statements.
• Profitability
– Is the ability to earn a profit.
• Many start-ups are not profitable during their first one to three
years while they are training employees and building their brands.
• However, a firm must become profitable to remain viable and
provide a return to its owners.
• Liquidity
– Is a company’s ability to meet its short-term financial
obligations.
• Even if a firm is profitable, it is often a challenge to keep enough
money in the bank to meet its routine obligations in a timely
manner.
• Efficiency
– Is how productively a firm utilizes its assets relative to its
revenue and its profits.
• Southwest Airlines, for example, uses its assets very productively.
Its turnaround time, or the time its airplanes sit on the ground while
they are being unloaded and reloaded, is the lowest in the airline
industry.
• Stability
– Is the strength and vigor of the firm’s overall financial
posture.
• For a firm to be stable, it must not only earn a profit and remain
liquid but also keep its debt in check.
• Forecasts (continued)
– New ventures typically base their forecasts on an estimate
of sales and then on industry averages or the experiences of
similar start-ups regarding the cost of goods sold and other
expenses.
• Budgets
– Are itemized forecasts of a company’s income, expenses,
and capital needs and are also an important tool for
financial planning and control.
• Financial Ratios
– Depict relationships between items on a firm’s financial
statements.
– An analysis of its financial ratios helps a firm determine
whether it is meeting its financial objectives and how it
stakes up against industry peers.
• Importance of Financial Management
– Many experienced entrepreneurs stress the importance of
keeping on top of the financial management of the firm.
• Ratio Analysis
– The most practical way to interpret or make sense of a
firm’s historical financial statements is through ratio
analysis, as shown in the next slide.
• Comparing a Firm’s Financial Results to Industry
Norms
– Comparing a firm’s financial results to industry norms
helps a firm determine how it stakes up against its
competitors and if there are any financial “red flags”
requiring attention.
• Forecasts
– The analysis of a firm’s historical financial statements are
followed by the preparation of forecasts.
– Forecasts are predictions of a firm’s future sales, expenses,
income, and capital expenditures.
• A firm’s forecasts provide the basis for its pro forma financial
statements.
• A well-developed set of pro forma financial statements helps a firm
create accurate budgets, build financial plans, and manage its
finances in a proactive rather than a reactive manner.
• Sales Forecast
– A sales forecast is projection of a firm’s sales for a
specified period (such as a year).
– It is the first forecast developed and is the basis for most of
the other forecasts.
• A sales forecast for a new firm is based on a good-faith estimate of
sales and on industry averages or the experiences of similar start-
ups.
• A sales forecast for an existing firm is based on (1) its record of
past sales, (2) its current production capacity and product demand,
and (3) any factors that will affect its future product capacity and
product demand.
Pro Forma Statement Shows the projected flow of cash into and out of a
of Cash flows company for a specific period.
• Ratio Analysis
– The same financial ratios used to evaluate a firm’s
historical financial statements should be used to evaluate
the pro forma financial statements.
– This work is completed so the firm can get a sense of how
its projected financial performance compares to its past
performance and how its projected activities will affect its
cash position and its overall financial soundness.